Labor Market Institutions, Firm-Specific Skills and Trade Patterns

65 Pages Posted: 9 Apr 2011

See all articles by Heiwai Tang

Heiwai Tang

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); The University of Hong Kong - Faculty of Business and Economics; CESIfo; Kiel Institute for the World Economy

Date Written: August 1, 2010

Abstract

This paper studies how cross-country differences in labor market institutions shape the pattern of international trade, focusing on workers’ skill acquisition. I develop a model in which workers undertake non-contractible activities to acquire firm specific skills on the job. In the model, workers have more incentive to acquire firm specific skills relative to general skills in a more protective labor market. When sectors are different in the dependence on these two types of skills, workers’ skill acquisition turns labor laws into a source of comparative advantage. By embedding the model in an open-economy framework with heterogeneous firms, sectors with different levels of dependence on firm specific skills, and countries with varying degrees of labor protection, I show that countries with more protective labor laws export relatively more in firm specific skill-intensive sectors through both the intensive and extensive margins of trade. I then estimate returns to firm tenure for different U.S. manufacturing sectors over the period of 1974-1993, and use the estimates as sector proxies for firm-specific skill intensity to test the theoretical predictions. By implementing the Helpman-Melitz-Rubinstein (2008) framework to estimate sector-level gravity equations for 84 countries in 1995, I find supporting evidence for the predicted effects of labor market institutions on both margins of trade.

Keywords: Labor market institutions, heterogeneous firms, margins of trade, trade patterns, firm-specific skills

JEL Classification: F10, F12, F14, F16, L22, J24

Suggested Citation

Tang, Heiwai, Labor Market Institutions, Firm-Specific Skills and Trade Patterns (August 1, 2010). Centro Studi Luca d'Agliano Development Studies Working Paper No. 301, Available at SSRN: https://ssrn.com/abstract=1804963 or http://dx.doi.org/10.2139/ssrn.1804963

Heiwai Tang (Contact Author)

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

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The University of Hong Kong - Faculty of Business and Economics ( email )

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CESIfo ( email )

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Kiel Institute for the World Economy ( email )

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